Revisions to the Community Reinvestment Act may cause lending woes in poor communities

Inside Subprime: January 16, 2017

By Caroline Thompson

The Trump administration is planning a major overhaul to the Community Reinvestment Act (CRA), which may make things difficult for residents of lower-income areas to borrow money.

First established in 1977, the CRA was designed to discourage banks from the practice of redlining, or flagging low-income and minority neighborhoods as “risky” borrowers, thus making it difficult for the people living in those communities to get a mortgage or business loan.

According to an article in Forbes, redlining largely prevented minorities from going through the normal channels to buy a home. “Even if people could get a mortgage,” wrote Forbes contributor Erik Sherman, “they’d face larger down payments, higher interest rates, and shorter repayment periods.”

The CRA was an attempt to rectify the systemic racial inequality and poverty brought on by redlining practices. The law, which has been updated several times since its inception, created a new system for lending that banks had to follow, which was based on more than just the racial and economic makeup of neighborhoods. It also created a grading system for the banks themselves, and a regulatory body tasked with ensuring that banks were responsibly addressing the borrowing needs of lower-income communities.

Currently, banks that don’t live up to grading standards are disciplined with harsh restrictions on expansions, mergers and new branch opportunities. One standard they have to uphold is meeting a set number of “community development” loans, designed specifically to help build affordable housing and help people out of poverty. However, the Trump administration is now seeking to expand the definition of “community development” to include projects that are not specifically designed to help the poor.

But expanding this definition could spell disaster for many residents of lower-income neighborhoods. If banks are no longer held accountable for the amount of community-facing loans they issue, it’s in their financial interest to stop issuing so many. If they can get away with calling, say, infrastructure lending “community development,” they can make the bulk of the loans in that category towards projects that don’t directly help to alleviate poverty.

According to Forbes, if banks are allowed to do this, they stand to make quite the profit.

“Current mortgage rates run around 4.25%. Interest rates on small business loans can easily approach 5.5%. Market rates on infrastructure loans can reach 7%, according to the EPA,” Sherman wrote.

While the U.S. Treasury Department claims these definitions are “outdated” and “in need of modernization,” getting rid of the standards that protect lower-income and minority communities seems like taking a step backwards, not forwards.

John Taylor, who is CEO of the National Community Reinvestment Coalition, told CNN he finds it ironic that the president is considering this move. After all, these rules were designed to protect the “blue-collar people Donald Trump maintains he represents.”

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